With the rise in interest rates, business owners need to take action to ensure they do not get into financial difficulties.
The recent raise in interest rates has been brought in to combat inflation. While this is good news for the economy as a whole, it poses serious challenges for small businesses which can be affected by the change: interest rate hikes will make it more expensive for businesses to borrow money.
If the cost of borrowing goes up, businesses face a choice: pass on costs to customers or lower their profits. This is especially true for businesses that are paying back variable-rate loans or lines of credit.
Stuart Pawelczyk, Head of Commercial Mortgages at Swoop says that there are a number of things a business can do in response to the increases:
“Broadly, if you can afford to increase your monthly repayments, do it, as this will limit the impact of rate rises on the total amount of interest you pay. If that’s not an option, stretching the repayment term will reduce your monthly repayments and benefit cash flow, but be mindful that the longer it takes you to pay money back, the more interest you pay over the life of the loan.”
As a business owner, you need to make sure you are doing everything you can to protect yourself from the impact of rising interest rates.
Here are Swoop’s top tips:
- Refinance/restructure your debt. If you have variable-rate debt, consider refinancing it to a fixed-rate loan. This will lock in your interest rate and protect you from future increases. Some of your debt may be disproportionately expensive – this should be the focus of your immediate efforts. Talk to Swoop about how you can achieve this.
- Pay down your debt. The less debt you have, the less you’ll be affected by interest rate hikes. Make a plan to pay down your debt as quickly as possible, starting with the most expensive.
- Increase your cash reserves. Having a healthy cash reserve will give you a cushion to weather any financial storms. Aim to have at least three months of operating expenses in your reserve. Swoop’s mantra is “cash is king”: we always make cash flow a priority, and have a number of options that can help you achieve this.
- Review your budget. Make sure your budget is as lean as possible. This will help you reduce your costs and make your business more resilient to changes in the economy. You should know you’re getting value for the money you spend.
- Be prepared to make changes. If interest rates rise, you may need to make some changes to your business. This could include raising prices, cutting costs, or reducing your workforce.
If you are in trouble, don’t avoid it: talk to your bank or lender. They may be able to offer you some helpful advice or options. At Swoop, our knowledgeable and experienced team work with SMEs and Property Professionals across the UK, providing support and guidance for all scenarios, from business/property acquisitions to debt restructuring. Speak to an expert to make sure you have the most appropriate and cost effective solutions in place.
Remember that you’re not alone: joining a business group or association can be a great way to network with other small business owners and learn about strategies for dealing with financial challenges.
Stuart recommends that before taking on a fixed rate, do your own research to try and get an understanding of what is happening to interest rates before making any commitment to fixed rates for a long period of time.
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